I’ve taken the liberty to bump this post to the top of the queue, because I think the point he’s making is important.
“It is worthwhile to have several investing or trading systems that you become comfortable with. People always talk about diversifying your stocks. But it is more important to be comfortable with a diverse set of approaches to investing. There are things to be gleaned from different approaches that can strengthen your overall personal portfolio management.”
What is the supposed purpose of ‘diversification’ within one’s stock portfolio? To reduce overall risk, right? The theory goes like this. If you own stocks that wiggle and waggle differently, what you might be losing on some of them, you might be gaining on others. But what, in fact, happens when markets are under severe stress? Correlations go to 1.0, and the supposed safety of owning “a diversified stock portfolio” disappears. (“Been there. Done that”, as have we all.)
To some extent, hedging against market downturns can be done by investing across several different asset classes, not just equities. But another way to keep (some of) your sanity when markets go crazy is to not be making the same bet multiple times, such as focusing on only small-cap/mid-cap growth stocks. Instead, consider selling short or using various options strategies, or trading the ‘ripples’ and ‘waves’ of a market with a portion of your money while also investing in the ‘tides’ with maybe the bulk of it.
I think the point Jhawker makes is important, and I think it merits discussion. Jump in, please.